3 Replies Latest reply on Jun 8, 2016 9:01 AM by MountainMamma

    Trying to Figure Things Out

    Teneele Bailey

      I am a young woman, in her early 30s, and I'm kind of late in my understanding of saving for retirement. What are the best ways to save up through your employer? I work in higher education, and I am enrolled in my job's retirement benefit plan. However, I don't think I'm contributing enough. What's a good percentage? Also, what's the best way to go about creating an emergency fund (for rainy days)? How do IRAs work? I have so many questions, and any info provided is greatly appreciated. Thanks, in advance!

        • Re: Trying to Figure Things Out
          Susanna144

          You have so many questions, it would be easy to feel overwhelmed by them, but it won't be bad at all if you study it a bit, and do some reading.  I don't think you are starting late.  Starting late would be in your 50s.  I suspect a good amount to save for you would be 14%.  That is slightly higher than the typical recommendation for somebody starting at age 30, and retiring at age 65 with 100K annual  income.  The American Association of Individual Investors has a good page on this subject, if you google Personal Financial Ratios you will find it near the top of the first page of search results.  If your income is lower, you might not need to save as much, because Social Security should replace more of your income.   Similarly, if your income is higher than 100K you need to save a bit more.  To create an emergency fund, I'd urge you to put aside some savings in a taxable account, not an IRA.  You can invest in a balanced mutual fund when it gets to be several thousand dollars, and the investment return on your savings starts to matter.   Mutual funds can be spent in 3 days, if needed, and they offer a much better return than a savings account, which is what many people use for their emergency funds.  An IRA is a great way to save taxes, and to save more than your employer's retirement plan.  IRAs could be invested in any of the funds that are available to you in taxable accounts, it's just an investment purchased with pre-tax money, that you are not supposed to spend until you reach retirement age.  You get to subtract IRA contributions from your income, and can even cancel out tax penalties, if you failed to have enough withheld, and it lowers your income sufficiently.  When you are selecting investments, pick something simple and inexpensive, because expenses are a really good predictor of future return.  If you buy funds that have recently beaten the competition, they usually do worse than average, in the future.

          • Re: Trying to Figure Things Out
            Shelly Eweka

            Save as much as you can in your retirement account, if you can put at least 10% that is a good start. Your goal should be to maximize the amount you are allowed to save, $18,000 per year.

             

            IRAs are great vehicles for saving for retirement. They have a lot of benefits and offer flexibility with investments.


            The best way to create an emergency fund to is to have a certain amount of your paycheck automatically go into a savings account that you do not touch unless you lose your job. Pay yourself first.

            • Re: Trying to Figure Things Out
              MountainMamma

              Teneele, I also work at a University. I don't know what type of retirement program your University offers, but I recommend taking full advantage of any program that the univeristy matches your contribution. In our program after I turned 50 I was required to contribute 10% of my salary but it was matched @ 100% by the University (it's a good deal).  Prior to that the maximum they would match was 7.5% so I made that full contribution as soon as I could.  In addition, I use a credit union for my personal banking since there are no fees. I agree with Shelly Eweka, one way to set up your emergency fund it to set up two accounts (e.g. I have 2 checking accounts that earn a minimal level of interest) and and use one to set aside money for your emergency expenses.  Make a deposit from every paycheck - even if you can only afford 1%... it will grow and eventually you will have an emergency account you can tap into when needed. Be diligent and only use it for emergencies, not for convience or impulse purchases.